Understanding Second Charge Mortgages

A second charge mortgage might frequently be referred to as simply a second mortgage because they have a priority that comes behind your first mortgage. These options are a form of secured loan, which means that your home is offered to the lender as a form of security. Many people use second charge mortgages to help them raise money when they don’t want to re-mortgage. However, as with most kinds of loans, there are a range of things you will need to think about before you apply for a second charge mortgage.

How Second Charge Mortgages Work

If you’re wondering whether you can get a second mortgage, the first thing to know is that you will only be able to get one if you are already a homeowner. However, that doesn’t mean that you necessarily need to live in the property to get a second mortgage. You can borrow a varied amount from a second charge mortgage by using the equity in your home as security against another loan. In other words you’ll end up with two mortgages on one property.

Equity is simply the percentage of the property that is already owned by you – which is generally the value of the home in total minus the amount of the mortgage that is already owed on it. For instance, if you buy a home that’s worth £250,000 and you’ve already payed £100,000, then you will have £100,000 equity. This means that the equity left will be the maximum amount you can borrow.

Today’s lenders must comply with stricter rules governing mortgage advance and dealing with payment difficulties. In other words, your lenders will need to make the same affordability checks that apply for a first or main mortgage. You will need to show your mortgage provider that you can afford to pay back the money that you are borrowing.

Benefits and Negatives of Taking out a Second Mortgage

Although it means that you’re going to be in more debt, there are many reasons why people might consider taking out a second charge mortgage. For example, if your credit rating has been reduced since you took out your first mortgage, deciding to re-mortgage could mean that you have to pay more interest overall on your full mortgage payments. If your mortgage has a high early repayment charge, then it could be cheaper to take out a second mortgage, rather than re-mortgaging. If you are struggling to get hold of some unsecured borrowing options, then you might need to consider a second mortgage.

On the other hand, just as there are certain reasons that might prompt you to take out a second mortgage, there are also circumstances when a second mortgage may not be appropriate from your needs. Remember that taking out a loan this big is a huge decision and you should weigh up the pros and cons carefully. For instance, if you are only barely managing to repay the mortgage that you currently have, then you should probably avoid committing to a second mortgage, as you could lose your home if you cannot make repayments. Similarly, you should never use a second mortgage to consolidate debts, as you may end up paying a great deal more interest. What’s more, you may be converting unsecured credit into secured credit which is more dangerous.

Before Taking Out a Second Mortgage

Before you take out a second charge mortgage, you may want to get some advice from an individual with the correct qualifications. These people will be able to help you find a loan that is best for your specific needs and situation. If you choose not to get any formal advice, then you may end up obtaining a loan that simply isn’t right for you. If this happens, then you might struggle to get help when you cannot make the repayments. #
Make sure that when you look into a second charge mortgage, you speak to your existing lender about what they might charge for another loan, and shop around for better deals. You should also find out the exact terms of the new mortgage, as well as early repayment charges, fees, and more.

The Alternatives and Risks

As with most loans, it’s important to remember that there is almost always an alternative solution available if it terms out that a second charge mortgage is not the right option for your specific needs. Remember that because a second charge mortgage works in the same way to your original mortgage, you will be placing your home at risk if you cannot keep up with the repayments.

If you decide to sell your home, then your first charge mortgage will be cleared in full before any of the money that you receive can go towards paying the second charge, because the first has priority. However, your second charge lender will still be able to pursue you for the money that they are owed which they have not yet received.